Features of Derivatives – Standardization, Margin, Zero Net Investment

What makes a Derivative different from buying a Share? It's the Leverage.

1. Key Features

A. Zero Net Investment (Leverage)

• You don't need to pay the full value of the asset. You only pay a small deposit called Margin.
• Example: To buy ₹10 Lakh worth of Nifty Futures, you only pay ₹1 Lakh Margin.
• Effect: Small money controls big value (Leverage).

B. Future Settlement

• The contract is agreed today, but settlement happens in the future (e.g., Expiry Date).

C. Secondary Market Trading

• Most derivatives (Futures/Options) are traded on Exchanges (NSE/BSE), making them highly liquid.

D. No Physical Delivery (mostly)

• Most financial derivatives are Cash Settled. You don't get the actual barrel of Oil; you just get the profit/loss difference.

2. Diagram: The Leverage Effect

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3. Exam Notes: Writing the Answer

Question: "Discuss the salient features of Financial Derivatives." (5 Marks)

Answering Strategy:

1. List: Bullet points are best.
2. Keywords: Use terms like "Derived Value", "Future Date", "Leverage", "Hedging Tool".
3. Explain Margin: Give the example of paying only 10% to control 100%.

Summary

• Double Edged Sword: Leverage makes you rich fast, or poor fast.
• Contract: It is a legal contract, not an asset itself.

Quiz Time! 🎯

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